FHLB ties to SVB and Signature Bank - What is the impact to insurers who borrow?

The Federal Home Loan Bank (FHLB), originally established to support mortgage finances, is today also a source of lending and/or liquidity for many insurers. In the wake of the recent regional banking turmoil, the 11 government-backed home-loan banks have come under scrutiny as SVB and Signature Bank borrowed billions from FHLB to plug shortfalls before collapsing.

What are the implications of this for FHLB and insurance companies? 

1. The FHLB may face a more detailed scrutiny of their lending practices, membership requirements, and mission. Critics argue that the home-loan banks have ventured too far from their original scope on housing and question the support of financially unstable banks.
2. Insurance companies who lean on advances, funding agreements, and borrowings at low interest rates from FHLB may be impacted by any changes to lending practices or requirements.

Corporate liquidity has been a huge concern leading into 2023. The liquidity and funding offered by FHLB is particularly important for the US insurance industry. FHLB provides a source of contingent, low-cost, and flexible liquidity during uncertain markets. As such, it acts as reassurance even if the insurer does not foresee future emergency liquidity needs.

• An increasing number of insurers (particularly mutual insurers who can be limited in funding alternatives) rely on FHLB borrowings and access to funding for business plans. ¹
• As of December 31, non-captive US insurers made advances, funding agreements, and borrowings from the FHLB of $137.1B, over 20 billion up from December 31 of 2021. ²
• FHLB insurance company membership increased from 542 to 565 between December 31, 2021, and December 31 2022. ³
• The percentage of FHLB borrowings by insurers has tripled from 2007 to 2022. ⁴

As you may recall, we have been working closely with a number of the FHL Banks for several years now as our insurance-clients became members and borrowers.  Still too early to fully understand how this banking crisis will impact insurers' ability to use the FHLB for liquidity.  We plan to keep a close eye on how things unfold.

1 Tim Zawacki. (2021). Insurers’ FHLB borrowings face headwinds in 2021 after reaching new record. S&P Global Market Intelligence. 
2 Tim Zawacki. (2023). Insurers, banks benefit from FHLB membership in stressful times. S&P Capital IQ.
3 Tim Zawacki. (2023). Insurers, banks benefit from FHLB membership in stressful times. S&P Capital IQ. 

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